A Debt-Free Future 4 tips for declaring your financial independence

A Debt-Free Future 4 tips for declaring your financial independence

It’s the month of fireworks, cookouts and parades that celebrate America’s independence. Yet with all the focus on Fourth of July festivities, many consumers struggle to establish their own personal financial freedom.

As the season of summer spending kicks into high gear, we conducted a survey to understand American attitudes about paying for something that everyone wants: vacation. The results show that many Americans have to rely on plastic when planning their getaways. Here’s a key figure from the report:

Twenty-eight percent of respondents indicated that they typically cover the costs of a vacation with credit cards and then pay them off during or following the trip.

If they wait too long to pay, those travelers will be bringing home more than memories when they return from their summer adventures. They’ll be packing some high-interest debt into their suitcases.

According to the survey, 32 percent of respondents plan on spending at least $1,000 per family member this year on vacation. With many credit card interest rates above 15 percent, you can see how finance charges can make that vacation cost much more if it isn’t paid off as soon as arriving home.

365 days of debt management

Your summer travel expenses are just one piece of the personal finance puzzle, though, and my partner in savings, Jean Chatzky, has plenty of saving tips for travelers this month.

Unfortunately, for many consumers, that buy-now-worry-about-the-costs-later approach is an obstacle throughout the year. If you’re staring at a mountain of debt that seems to get taller each month, you’re probably not planning a vacation. You’re trying to figure out if there’s a way to put your past expenses behind you.

Here are four frequently asked questions that can help you understand how to declare your financial independence.

What about adding to my savings?

While I’ve covered the need to continue contributing to your savings, paying off your credit card debt is equally if not more important. Think about it: If you’re carrying a $5,000 credit card balance each month while putting a chunk of cash into your low-interest savings account, you’re only making the situation harder on yourself. It’s nice to watch your savings grow, but not if you’re watching your debt grow at a faster pace.

If you’re carrying balances on multiple cards, compare the interest rates. While I know paying off the lowest balance in full can give you a sense of accomplishment, you’ll want to pay down the card with the highest interest rates first. Bankrate has a good calculator for this.

You can consider balance transfer offers, but you’ll need to pay close attention to the terms to determine if they will actually save you any money. Many balance-transfer offers come with tempting promotional zero-percent interest terms, but a much higher rate will kick in once that introductory term is over.

Aren’t my rewards points adding up?

I’ve heard it time and time again. “I’ll just put it on my card. After all, my rewards program is great.”

Credit card rewards programs can be very lucrative—if you pay off your balance in full each month. If you don’t, they’re very rewarding for your card issuer. One percent back on your grocery bill isn’t going to matter much if that bill isn’t paid off immediately. Don’t let your rewards points fool you: The most rewarding credit card behavior is avoiding finance charges.

Should I break up with plastic?

I’m not advocating that you cut up all your credit cards. In fact, that would be a bad move. Credit cards can play a valuable role in strengthening your credit score. I’m simply urging you to use them responsibly. However, if you need a wake-up call for your spending behavior, it may be a good decision to take a hiatus from pulling out that piece of plastic at the cash register. You can get your spending under control by going on a cash diet. That way, you’re paying for everything up front and avoiding purchases that you can’t afford.

Credit card debt can feel overwhelming, but climbing out of it is possible. It all starts with your personal decision to plan for a debt-free future.